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Operator
Good morning, and welcome to Deere & Company fourth-quarter earnings conference call.
(Operator Instructions)
I would now like to turn the call over to Mr. Tony Huegel, Director of Investor Relations.
Thank you.
You may begin.
- Director of IR
Hello.
Also on the call today are Raj Kalathur, our Chief Financial Officer, and Josh Jepsen, our Manager of Investor Communications.
Today, we'll take a closer look at Deere's fourth-quarter earnings, our markets, and our initial outlook for FY17.
After that, we'll respond to your questions.
Please note that slides are available to complement the call this morning.
They can be accessed on our website at www.JohnDeere.com.
First, a reminder: this call is being broadcast live on the Internet and recorded for future transmission and use by Deere & Company.
Any other use, recording or transmission of any portion of this copyrighted broadcast without the express written consent of Deere is strictly prohibited.
Participants in the call including the Q&A session, agree that their likeness and remarks in all media may be stored and used as part of the earnings call.
This call includes forward-looking comments concerning the Company's plans and projections for the future, that are subject to important risks and uncertainties.
Additional information concerning factors that could cause actual results to differ materially is contained in the Company's most recent Form 8-K, and periodic reports filed with the Securities and Exchange Commission.
This call also may include financial measures that are not in conformance with accounting principles generally accepted in the United States of America, or GAAP.
Additional information concerning these measures, including reconciliations to comparable GAAP measures, is included in the release, and posted on our website at www.JohnDeere.com/earnings under other financial information.
Josh?
- Manager of Investor Communications
John Deere today reported solid financial results for the fourth quarter, and did so in spite of the continuing impact of the global farm recession, and difficult conditions in the construction equipment sector.
As in prior quarters, our performance was helped by the sound execution of our operating plans, the impact of a broad product portfolio, and our success keeping a tight rein on costs and assets.
For the full year, the Company had earnings of $1.52 billion, a top 10 year.
In our view, that's a noteworthy achievement, in light of tough business conditions, and certainly well above the levels we've experienced in previous downturns.
For 2017, we're looking for similar overall market conditions, with a slight decline being forecast for sales and earnings.
Now, let's take a closer look at the fourth quarter in detail, beginning on slide 4. Net sales and revenues were down 3% to $6.52 billion.
Net income attributable to Deere & Company was $285 million.
EPS was $0.90 in the quarter.
On slide 5, total worldwide equipment operations net sales were down 5% to $5.65 billion.
Price realization in the quarter was positive by 3 points.
Currency translation was favorable by 1 point.
Turning to a review of our individual businesses, let's start with agriculture and turf on slide 6. Net sales were down 5% in the quarter-over-quarter comparison.
Lower sales were recorded in most regions of the world, mainly in the US and Canada.
One notable exception was South America, which experienced higher sales, led by Brazil and Argentina.
Operating profit was $371 million, and operating margins were 8.4% in the quarter.
The increase in operating profit was primarily driven by price realization, and to a lesser extent, by lower pension and OPEB expense, material, and production costs.
Before we review the industry sales outlook, let's look at some of the fundamentals affecting the ag business.
Slide 7 outlines US farm cash receipts.
Given the large crop harvest in 2015, and consequently the lower commodity prices we're seeing today, our 2016 forecast calls for cash receipts to be down about 6% from 2015's levels.
Moving to 2017, we expect total cash receipts to be approximately $367 billion, about the same as in 2016, as lower livestock cash receipts are offset by higher crop receipts.
On slide 8, global grain and oil seed stocks to use ratios are forecast to remain at elevated but generally unchanged levels in 2016 and 2017, as abundant crops are mostly offset by strong demand conditions around the world.
Chinese grain and oil seed stocks have continued to increase in 2016, with supply domestic production plus imports outpacing demand.
Chinese stocks of grain and oil seeds now represent almost half the world's stocks.
Given these stocks are unlikely to be exported, the world market is sensitive to any production setbacks or major geopolitical disruptions.
World cotton stocks have now fallen for a second consecutive season, and to the lowest level in five seasons, reflecting lower planting and stronger global demand.
Our economic outlook for the EU 28 is on slide 9. Geopolitical risks such as Brexit remain elevated, contributing to the outlook for slow economic growth.
Farm incomes remain under pressure, and is below long-term averages, especially after a poor harvest in France.
The dairy sector continues to experience weakness, although there are signs the market is bottoming out.
As a result, industry farm machinery demand in the EU region is expected to be down about 5% in 2017.
On slide 10 you'll see economic fundamentals outlined for other targeted growth markets.
In China, slower economic growth persists, and ag policy changes are causing short-term uncertainty for both domestic and global markets.
As a result, we anticipate lower industry sales.
Turning to India, the government continues to focus on reviving growth in the ag sector, and improving farm incomes.
The value of agricultural production is expected to increase as a result of normal rains after two years of below-average monsoons.
These factors are expected to drive increased industry demand in India.
Shifting to Brazil, slide 11 illustrates the crop value of agricultural production, a good proxy for the health of agribusiness.
Ag production is expected to increase about 7% in 2017 in US dollar terms, due to a recovery in corn and the continued increase in ethanol demand.
From a local currency perspective, the change is about 6%.
Ag fundamentals remains positive, and farmer confidence is at its highest level since 2013, due to improved political stability, and signs of economic progress.
We expect these factors to lead to higher industry equipment sales.
Staying in Brazil, slide 12 illustrates the finance rates for ag equipment.
Moderfrota rates announced earlier this year remain at 8.5% for small and mid-size farmers, and 10.5% for large farmers.
The government's ongoing commitment to agricultural continues, and indications of shifting budgets to ensure availability of funds for Moderfrota are positive signals for the farm sector in Brazil.
Our 2017 ag and turf industry outlooks are summarized on slide 13.
Industry sales in the US and Canada are forecast to be down 5% to 10%, with the effects being felt in both large and small models of equipment.
Still, there are signs the large ag market is nearing bottom, as indicated by the fact that the decline expected in 2017 is less than we saw in 2016.
The EU 28 industry outlook is forecast to be down about 5% in 2017, due to low crop prices and farm incomes, as well as persistent pressure on the dairy sector.
In South America, industry sales of tractors and combines are projected to be up about 15% in 2017, a reflection of the factors already discussed for Brazil, as well as positive industry sentiment in Argentina.
Shifting to Asia, sales are expected to be flat to up slightly, with growth in India being the main driver.
Turning to another product category, industry retail sales of turf and utility equipment in the US and Canada are projected to be roughly flat in 2017, with Deere sales outpacing the industry.
Putting this all together on slide 14, FY17 Deere sales of worldwide ag and turf equipment are forecast to be down about 1%, including about 1 point of positive currency translation.
The ag and turf division operating margin is forecast to be about 8.5% in 2017.
Now, let's focus on construction and forestry on slide 15.
Net sales were down 5% in the quarter, due to lower shipment volumes and higher sales incentive costs, both mainly driven by the US market.
The US and Canadian markets continued to be extremely competitive, and the pricing environment remains challenging.
The division incurred an operating loss of $17 million in the quarter, due to higher sales incentive costs, an impairment charge for international operations of $25 million, and higher production costs.
The division's decremental margin was 33% for the full year.
Moving to slide 16, and looking at the economic indicators on the bottom part of the slide.
GDP growth is positive, construction spending is increasing, and housing starts are expected to exceed 1 million units again this year.
In spite of these positive signals, the market demand for construction equipment continues to be weak.
Factors contributing to the weakness have not changed dramatically over the past quarter.
Conditions in the oil and gas sector, for example, continue to be slow.
Also, construction contractors are delaying fleet replenishment, because of the uncertain markets.
Rental utilization rate declines persist, leading to a reduction in fleets, and elevated levels of used inventory.
Housing starts in the US for single family homes remain below the long-term average, and multifamily home construction is slowing, due to over-building in some parts of the country.
On balance, Deere's construction and forestry sales are forecast to be up about 1% in 2017, with positive currency translation of about 1 point.
Global forestry markets are expected to be roughly flat in 2017.
C&F's full-year operating margin is projected to be about 3.5%.
Let's move now to our financial services operations.
Slide 17 shows the provision for credit losses as a percent of the average owned portfolio.
The provision at the end of 2016 was 23 basis points, reflecting the continued excellent quality of our portfolios.
The 2017 forecast anticipates a loss provision of about 29 basis points, up somewhat from historically low levels of recent years.
This puts the provision just above the 10-year average of 26 basis points, though below the 15-year average of 34 basis points.
Moving to slide 18, worldwide financial services net income attributable to Deere & Company was $110 million in the fourth quarter, versus $153 million last year.
2016 net income attributable to Deere & Company was $468 million, compared with $633 million in 2015.
The lower results for both periods were primarily due to less favorable financing spreads, higher losses on residual values, and the higher provision for credit losses.
Also, remember that full-year 2015 results benefited from a gain on the sale of our crop insurance business of about $30 million.
Deere's worldwide financial services operation is expected to earn about $480 million in 2017.
The outlook reflects lower losses on lease residual values, partially offset by less favorable financing spreads, and an increased provision for credit losses.
Slide 19 outlines receivables and inventories.
For the Company as a whole, receivables and inventories ended the year down $517 million.
They're expected to decline again in 2017 by about $250 million.
For the year ahead, we expect to produce in line with retail demand for large ag equipment, while underproducing in the small ag sector, which is mostly related to mid-size tractors and other livestock-related products.
Before getting into cost of sales, let's discuss the voluntary separation programs initiated during the fourth quarter of 2016, as part of efforts to improve our cost structure.
As noted in today's earnings announcement, pretax expenses related to the programs were $11 million in 2016, and will be about $105 million in 2017, most of which will be incurred in the first quarter.
These expenses are recorded in the period employees accept the offer.
While the voluntary separation programs apply to salaried employees throughout the US, a vast majority of those accepting offers were within the equipment divisions.
These costs have an impact on cost of sales, R&D, and SA&G.
Savings from the programs are expected to be about $75 million in 2017.
Moving to slide 20.
Cost of sales as a percent of net sales for 2016 was 78%, versus previous guidance of 78.7%, a result of structural cost reduction efforts.
Our guidance for 2017 cost of sales is about 78%.
When modeling 2017, keep these unfavorable impacts in mind: An unfavorable product mix, overhead spending, and tier 4 product costs.
On the favorable side, we expect price realization of about 1 point, and lower incentive compensation expense.
Please note that our cost of sales guidance is flat with 2016, in spite of increasing commodity costs, higher pension and OPEB expenses, and lower volume.
Now let's look at some additional details, with respect to R&D expense on slide 21.
R&D was down 4% in the fourth quarter and 3% for the full year.
Currency translation had a negative impact of 1% for the full year.
Our 2017 forecast calls for R&D to be down about 3%.
Moving now to slide 22, SA&G expense for the equipment operations was up 3% in the fourth quarter, with commissions paid to dealers, incentive compensation, the voluntary separation programs, and pension and OPEB expense accounting for 2 points of the change on a net basis.
SA&G expense for the full year was down 5%, with currency translation, pension and OPEB expense, and incentive compensation accounting for most of the change.
Our 2017 forecast on slide 23 shows SA&G expense being up about 1%, with a net impact of about 2 points from the voluntary separation program, currency translation, and incentive compensation.
Turning to slide 24, pension and OPEB expense was down $53 million for the quarter, and down $200 million for the full year.
The forecast for pension and OPEB expense for 2017 is up about $30 million.
On slide 25, the equipment operations tax rate was 32% in the quarter, and 30% for the full year.
The lower rate resulted mainly from discrete items.
For 2017, the projected effective tax rate is forecast to be in the range of 33% to 35%.
Slide 26 shows our equipment operations history of strong cash flow.
Cash flow from the equipment operations was $2.9 billion in 2016, and is forecast to be about $2.5 billion in 2017.
The 2017 outlook for the first quarter and full year is on slide 27.
Net sales for the quarter are forecast to be down about 4%, compared with 2016.
This includes about 1 point of price realization, and about 2 points of favorable currency translation.
The full-year forecast calls for net sales to be down about 1%.
Price realization and favorable currency translation are each expected to be about 1 point.
Finally, our full year 2017 net income forecast is about $1.4 billion.
Comparing 2016 and 2017, slide 28 shows the high level reconciliation of operating profit for the equipment operations, adjusted for special items.
Operating profit was $1.88 billion for the equipment operations in 2016.
Included were special items which require consideration: a $75 million pretax gain from the sale of a partial interest in SiteOne landscape supply, impairment charges for C&F operations internationally of about $25 million, and voluntary separation programs of $11 million.
Adjusted for these factors, 2016 operating profit would have been $1.841 billion.
Based on the guidance provided for net sales changes in 2017, and operating margins by segment, the implied operating profit for the equipment operations is forecast to be between $1.7 billion and $1.75 billion.
Included were the following items of note: voluntary separation program cost of $96 million related to the equipment operations, pension and OPEB expenses of about $30 million, and other nonrecurring costs of about $55 million.
After adjusting for these items, implied operating profit for 2017 is in the range of $1.88 billion to $1.93 billion.
On an adjusted basis, the comparison shows an improvement between $40 million to $90 million for 2017, even with lower sales volumes, which are projected to be down about 3%.
The lower volumes negatively impact the 2017 forecast.
When considering these special and nonrecurring items, as well as the impact of lower volumes, they show the Company's continuing to deliver improved operational performance, due in part to structural cost reduction initiatives.
I'll now turn the call over to our CFO, Raj Kalathur, for additional comments.
- CFO
Thanks, Josh.
Last quarter, we talked about our plans to improve pretax profit by at least $500 million through structural cost reduction by the end of 2018.
Now, these benefits would apply to 2016 volume levels.
We expect to see the full benefit of the $500 million improvement in the year 2019 and beyond.
These cost reduction efforts began in March of 2016, and contributed in excess of $90 million for the year 2016.
The 2017 forecast includes an additional about $190 million of structural cost reduction.
Here's some detail about where the $500 million in improvements is expected to come from: Number one, structural direct and indirect material cost reduction is the largest contributor of improvement, roughly one-third.
Now, this is the result of leveraging existing supplier relationships, resourcing, and designing cost out of our products.
Second, people related costs are the second largest category of reduction, about 1/5 of the total improvement.
The voluntary separation program discussed is a significant example.
Other areas of improvement include changes to our variable pay structure, especially under trough conditions, as well as lower R&D spending, and lower depreciation associated with lower capital expenditures.
Overall, our teams are making good progress towards the $500 million plus goal and we have confidence it will be realized.
In conjunction with sound execution, disciplined cost management will allow us to continue delivering significantly better performance than in downturns of the past, and of course, these same factors will provide a continued benefit when market conditions strengthen.
All in all, then, we remain of confident in our Company's present direction and believe Deere is well-positioned to provide significant value to our customers and investors in the future.
- Manager of Investor Communications
Thanks, Raj.
Now, we're ready to begin the Q&A portion of the call.
(Caller Instructions)
Leon?
Operator
Thank you.
We will now begin the question-and-answer.
The first question comes from Jamie Cook from Credit Suisse Securities.
Your line is open.
- Analyst
I don't know where to start.
Raj, I appreciate the incremental color that you gave us associated with the $500 million and the savings that you outlined, the $90 million, the $190 million in 2017.
And you gave more color on costs, you know what I mean, the $116 million.
But can you just give us more color?
So for 2016, 2017 and 2018, what are the costs each year associated with the $500 million?
- CFO
So Jamie, we said for 2016, it's in excess of $90 million on operating profit basis.
Okay.
- Analyst
Okay.
- CFO
Benefit.
- Analyst
What's the cost?
- Director of IR
The costs associated with that.
- Analyst
I want the costs associated with those savings each year.
- CFO
We have said the vol sep costs are the primary ones, if you look at it.
We said it's about $11 million in 2016.
In 2017, we have said that the benefits are an incremental $190 million, and we have also said the costs are $105 million in total.
So $105 million in total in 2017.
So, now, there will be some costs, but you will realize that on a structural, material and indirect and direct material cost side.
The costs will be pretty minimal.
The benefits will be substantial, okay?
On the voluntary separation type programs, there will be a cost and we have told you a lot of that in 2016 and 2017.
- Director of IR
As we go forward, Jamie, if there are significant -- to your point, if there are significant costs similar to the voluntary separation, we'll certainly call those out as those are incurred, and try to keep people abreast of what those are.
At this point your question about 2018 --
- Analyst
I was just trying to understand what was incremental to the $11 million and the $105 million that you had pointed out.
Last quarter you said three buckets, SG&A and material costs.
You know what I mean?
I was trying to get more color beyond what you provided.
- Director of IR
Undoubtedly there is some, but there is nothing of significance.
- Analyst
Okay.
I'll get back in queue.
Thanks.
- Director of IR
Thank you.
Next caller?
Operator
The next question comes from Andy Casey.
Your line is open.
- Analyst
Happy Thanksgiving early.
I had a question on financial services.
It looked like it took about a $10 million cash charge for impairment during the quarter.
You guided contribution up for 2017.
Can you discuss what you're seeing in terms of dealer originations for operating leases, and whether -- it sounds like you're feeling more comfortable about the residual value of risk going forward.
Can you talk about what you're seeing?
- Director of IR
Sure.
As you think about the maturities and so on with leases, keep in mind, we talked about this last quarter, we did have a significant level of maturities that occurred in the fourth quarter.
In fact, if you look at October alone, the month of October in terms of what sales we had of matured leases, about two to three times the typical month that we've had.
And again, that's on the sale side.
So we did see, again, on maturity, a pretty significant peak in the fall.
We will, as we go forward, as you think about lease maturities, you'll continue to see some of those seasonal increases.
So as we mentioned before, you'll see some increase in the spring generally, and then again in the fall.
So typically, our second and fourth quarters are the quarters that we'll see those.
But at this point, we would anticipate what we saw fourth quarter 2016 would be the highest peak, from a maturity perspective.
Certainly, we continue to see customers continuing to elect operating leases at a bit higher level than what we would have seen on a more historic basis.
I think the current market conditions explain much of that, but I would also point out, it isn't at some of the extreme levels that I've seen being reported.
If you look over the last 12 months, for example, so for 2016, if you look at just the retail financing of equipment, so comparing retail notes versus operating leases, operating leases in terms of volumes coming in the door were about 25% of the total.
That's up.
Historically, we'd be in the mid to upper teens.
So it's certainly on a more elevated level, but not to the degree, or to the extent that some perhaps have reported.
So hopefully it gives you a little bit of color on where we're at with the operating leases, but to your point, as we move forward, especially when we get past second quarter with some of the changes that were made at that point in time on the short-term leases, we would feel -- and you're seeing it reflected in the forecast, a bit more confident on that front as we go into 2017.
Thank you.
Next caller?
Operator
Thank you.
The next question comes from Jerry Revich.
Your line is open.
- Analyst
Happy Thanksgiving, everyone.
Can you folks talk about, now that you've completed largely anyway the Tier 4 transition, how much of the cost improvement that you're seeing in 2016 and into 2017 is from lower factory and lower procurement costs, now that you're focusing on optimizing the cost structure on the products?
How much of a tailwind is that dynamic for you over the two years?
- Director of IR
I think that's unfortunately a level of detail I'm not going to be able to provide.
If you think of it on a higher level, I think it's worth noting, we still have emissions transition costs anticipated.
Some of that is final Tier 4. We still have some final Tier 4 conversions, but also keep in mind as we go into 2017, Brazil has a Tier 3 conversion, so there will be some costs there.
So emissions does continue to be an increase year-over-year.
That's on the one side.
To your point, a portion of what we've talked about with the structural cost reduction is going back to some of those applications on final Tier 4, where we have first and foremost found the most reliable solution.
Now going back and looking at, are there ways we can still clearly meet those requirements, but do so on a less expensive basis.
And so that really goes to -- and would contribute to some of that a third of the cost reduction that we're targeting on product cost.
A good portion of that does relate to some of the Tier 4 future savings we would hope, as we take some of those costs out of products on a go-forward basis.
- Analyst
And Tony, just to clarify, the transition costs, you mentioned they're up in Brazil, but globally they're down, correct?
- Director of IR
It would still be an incremental cost on a global basis.
Remember those costs generally don't go away.
You still have -- you have Brazil transitioning.
You have other products on a global basis transitioning.
You've got the forestry products in Europe.
You would still have some smaller product in the US that would be going through some transition.
China, we've gone through some Tier 3 transitions.
So emissions, broadly speaking, continues to move forward on a global basis.
And so that will continue to provide some additional cost as we go forward, at least for the foreseeable future.
Thank you.
Next caller?
Operator
The next question comes from David Raso.
Your line is open.
- Analyst
My question's on pricing.
Obviously the 3% was pretty impressive.
We haven't seen that in many, many quarters.
Maybe it dovetails a bit into how you're viewing Deere Capital and the losses for residual values, but can you take us through a little bit, what are you seeing on pricing, the 3% for the quarter, and maybe the pricing that you see in the order book, and the used pricing as it relates to the residual value thoughts for next year?
- Director of IR
When you think about the new pricing, specifically in the quarter, I would say it really is attributed to the discounting was down pretty significantly, and you saw that coming through in the 3 points of price realization.
I'd say it's particularly true for the ag business, as we've talked about with construction.
That continues to be actually the opposite story.
It's a very challenged market from a competition perspective, and a pricing perspective.
With used pricing, I would say more of what we said last quarter, where we really have seen, I would say stabilization of that used pricing.
As we speak with dealers, much higher confidence as they're negotiating trade-ins, the value that they're able to put on that trade-in, and what they feel they can accept.
Keep in mind the challenge always on residual values is that's more about the wholesale perspective and the ability for dealers to purchase that used equipment coming off of lease, and adding it to their used inventory levels.
So we do continue to see some lower residual values on leasing, and you saw that reflected in the results for the quarter, but again, I think the good news there is generally stabilization on that used equipment pricing.
- Analyst
Okay.
Quickly, as the SiteOne gain from last year, I believe you don't have any SiteOne gain in 2017's guidance, but given the secondary that's out there already, can you at least help us with -- assuming -- can you give us some idea of the size of the gain essentially, given where the stock is today versus May, to calibrate it?
Or is there any reason not to assume there's a gain from the secondary?
- CFO
David, there is a follow-on offering that SiteOne has come out with, but it's not in our forecast, and that's probably all we can say about it.
Registering for a follow-on offering is one thing, and actually doing it a secondary thing.
So we don't want to talk about the probabilities of that.
- Director of IR
There will be update -- if and when it happens, it would be updated at that point in time.
- CFO
It's not in our 2017 forecast.
- Director of IR
Next caller?
Thanks, David.
Operator
Thank you.
The next question comes from Steve Fisher from UBS Securities.
Your line is open.
- Analyst
Just a follow-up on the pricing question.
So it sounds like things are nicely stabilizing in the ag business, allowing you to get that 3%, with the lower discounting.
Just curious why isn't that sustainable into 2017, given that you're forecasting a more moderate pricing benefit in 2017?
Or are you assuming that there could be some upside to that as the year goes on?
- Director of IR
Well, again, I think the thing I would point out is keep in mind that's a quarter-over-quarter difference, so you're comparing what happened in 2015 to what happened in 2016 and so we certainly didn't see the increased level of incentives that we perhaps would often see in the fourth quarter, didn't repeat in 2016.
So again, I think as you go forward we're still focused on seeing good, positive price realization across equipment operations, and you're seeing that reflected in the forecast.
So candidly, we are still in very low end markets, especially as you think about large ag equipment, and so the price realization is, I think, fairly attractive, given that perspective.
But it's really driven I'd point out by our ability to continue to innovate.
You're seeing that in our R&D spend and now you're seeing the benefit of that.
As we bring innovative new product out, we're able to then see that in the form of price realization.
And so I think, again, I think it's a pretty positive story overall.
Thank you.
Next caller?
Operator
Thank you.
The next question comes from Ross Gilardi from Bank of America Securities Merrill Lynch.
Your line is open.
- Analyst
Just wondering, can you just talk more about how your early order program finished out, or is looking now?
And the backlog by region?
And does your current order intake reflect the 15% increase that you're forecasting for South America?
- Director of IR
So as you think about orders, and keep in mind, early order programs primarily relate to the US and Canada, on large ag equipment.
You'd see it in limited form in some of the other parts of the world.
As you think about the combine early order program, keep in mind, it's still in process, so that actually ends in January.
During the quarter, we would have ended our second phase of a multi-phase program.
I would tell you the order intake there was very supportive of the forecast in that regard, and again, on large tractors we continue to be pretty much in line, slightly behind on the 8R tractors.
You think about availability year-over-year.
But again, very supportive order position on the North American large ag versus our forecast.
As you think about outside and I think maybe the most significant one is Brazil in South America, and I think the question there that we talked about last quarter was how much of that is simply pull-ahead of that Tier 3 conversion that I mentioned previously.
And we are seeing strength in the order book beyond the January 1 date.
And so that really is why we're reflecting that higher level of sales for the full fiscal year.
Certainly, you'll see some strength in the next couple of months, this month and in December ahead of that Tier 3. But our belief is what we're seeing in the order book, that strength will continue beyond December 31.
So the short answer to your question on South America is yes, we are seeing it in the order book.
All right.
Thank you.
Next caller?
Operator
Thank you.
The next question comes from Robert Wertheimer from Barclays Capital.
Your line is open.
- Analyst
Now that we've finished out the year, you've noted in the past obviously how the 100-plus horsepower category isn't really big farming tractors anymore, stuff has crept in.
Can you give us a sense of what your high horsepower, whatever you want to do is versus maybe the O2 trough, or how far down we are from peak on your revenues.
- Director of IR
Again, we don't break out the inventory levels in quite that much detail.
I think what is worth -- pardon me?
- Analyst
Revenues.
What production was or revenue were for you versus prior peak and troughs?
- Director of IR
Again, we don't guide on what those levels are by product type, per se.
But I think when you think about the levels that we're seeing from an inventory perspective specifically, with that 100-plus, we did end the year with higher levels of 100-plus horsepower tractors, but as you point out, that was almost all below the 200 -- 220-horsepower, what we would call large ag.
And really in that 6000 series type of product and you see that reflected in our lower receivables in inventory next year.
For the ag division.
Much of that is that mid-size equipment getting pulled down further in 2017.
And some of that, candidly, is we ended the year higher than we would have liked on the 6000s, in particular.
We talked a lot about that issue in the past.
As you think about large ag equipment, as we expected, we are producing mostly to retail on large ag equipment as we go into 2017.
That's I think reflected in that sales outlook.
- Analyst
Okay.
Thanks, Tony.
- Director of IR
Thank you.
Appreciate it.
Next caller?
Operator
The next question comes from Mike Shlisky from Seaport Global Securities LLC.
Your line is open.
- Analyst
A lot of questions here, but maybe I'll just touch on turf and utility on my question.
You said that it should be flat in 2017 with Deere outperforming.
Can you give us more color as to why you might outperform?
Is there a change in dealership networks or new products there or anything else you point to there as to why Deere might be better than the industry in 2017?
- Director of IR
Sure.
I think probably the biggest category, or biggest reason there is simply the new products that we have in the market, and we would expect those to help continue to provide some market share.
So that would be the short answer.
All right.
Thank you.
- Analyst
Thank you so much.
- Director of IR
Next caller?
Operator
Next question comes from Tim Thein from Citigroup Global Markets.
Your line is open.
- Analyst
Tony, just want to come back to one of the headwinds you've cited for ag and turf being product mix, and I know you used to provide that in a basis point term, but I'm not sure you can do that now.
But just thinking through your comments with producing in line in large ag, and not in small, Brazil being up nicely, both of which you think would be positive for mix.
So maybe just put a little bit more color around your expectations for product mix.
Thank you.
- Director of IR
Right.
Generally when we talked about large versus small, we've also pointed out small really combines mid-size and utility, and so what you're seeing in some of that underproduction, as I mentioned earlier, a lot of that underproduction is coming in that mid-size product, which, again, from a mix perspective, would be a bit more negative.
So as you think about year-over-year strength and weaknesses in the business, you're still seeing a fair level of weakness in some of that mid to large equipment, at least year-over-year, with continued strength in the smaller end of the portfolio.
So that's just from a product mix perspective.
And given where South American volumes are today, that geographic mix wouldn't be as attractive as what it would be, if we were in more normal levels.
Keep in mind, their production is significantly down, as well.
And so that does put pressure there.
So it's a combination of those things.
Volume, candidly though, year-over-year volume for ag and turf is the bigger headwind.
There is some mix impact as well.
- Analyst
All right.
Understood.
Thank you.
- Director of IR
Thank you.
Next caller.
Operator
The next question comes from Mircea Dobre from Robert W. Baird and Company.
Your line is open.
- Analyst
A lot of questions already asked.
I'm going to ask you a tax question, if you would.
Have you formed some view, or do you have any internal modeling as to how your tax rate might progress going forward, if what Mr. Trump is proposing out there in terms of tax reform actually comes to be?
- Director of IR
I'm going to take that question and make it broader than just tax.
And what I would tell you is the things -- the most important thing is anything that's being talked about in media and anywhere else is obviously speculation at this point, in terms of what may or may not happen.
And so certainly internally, we're evaluating different scenarios.
So the short answer to your question is of course, we're looking at what that impact may or may not be, but we're looking at all kinds of scenarios.
Because at the end of the day, we want to be prepared for whatever does become reality.
But at this point it would be premature to talk about that publicly, just because it would be pure speculation.
We do appreciate the question.
Thanks.
Next caller.
Operator
The next question comes from Brett Wong from Piper Jaffray & Company.
Your line is open.
- Analyst
Just wondering if you could talk to Europe a little bit, considering we haven't talked about that yet.
Just wondering drivers behind the down 5% and what could you posit to seeing a bottoming in the weak areas there?
- Director of IR
Certainly Europe, as you're well aware is -- it's always a mixed bag, country by country in terms of where you may be seeing some strength versus weakness.
I'll start with dairy, though.
Really what we're saying there is in some of the dairy pricing, you're certainly starting to see some of that level out.
You even see some periods where dairy pricing was up pretty nicely.
But it's early, but again, I think that's why we characterize it as we did.
There are signs that it's bottoming.
That doesn't mean it bottomed, or how soon things might recover.
But that is a positive versus where we would have been even as early as last quarter incrementally in Europe.
But if you think about more broadly, clearly I think maybe two of the more noteworthy regions there, France which is our largest market, went through a very difficult harvest, and the harvest is down, farm incomes are going to be lower.
That's going to put pressure clearly on sales there.
And coupled with that, as you're probably aware there was a tax incentive program earlier in the year in France, that did drive a lot of sales, and now while it's still in place, not a lot of income for those French farmers.
So unlikely to have anywhere near the type of advantage it did last year.
So arguably France would be a more challenged market.
In the very short term, I want to emphasize that, concerns around Brexit and so on could -- is expected to drive some benefit for the UK.
You've seen exports of used equipment become much more attractive with the FX shifts.
And in the short term, likely to see some higher level of sales, as most of those customers there are expecting that they'll see some price increases, as most manufacturers are importing into the UK.
And so, again, with the FX shift that's likely to drive higher pricing, and so they're buying ahead of that.
So there would be some benefit again, in the short term there.
Longer term, obviously that would likely have more downside than upside.
So I think those are maybe a couple of the more significant, especially when you throw the dairy commentary in, the more significant pieces of Europe, as you think about 2017.
Thank you.
Next caller.
Operator
Thank you.
The next question comes from Joel Tiss from BMO Capital Markets.
Your line is open.
- Analyst
I just wondered if you could talk a little about your production levels, because just trying to understand how the volumes at the factories are moving, how much you underproduced retail in 2016, and I know you said you're going to produce in line with 2017, just so we can get a little bit of a sense of the production changes underneath the covers there.
- Director of IR
Sure.
I would start with while certainly being able to produce to retail in some of those large ag factories is a benefit year over year, I'd stress, we're still at really low levels.
We've talked before about capacity being below 50% in most of those -- really across the board in the large ag facility.
That wouldn't change, with the ability to build to retail.
Keep in mind, while we did draw field inventories down last year, it wasn't as significant of a drawdown as what we experienced, for example, in 2015.
So again, you get benefit but it's not like all of a sudden those factories are running at highly efficient levels.
So I think that's probably the most important thing to keep in mind.
We haven't talked about the level of specifically what the underproduction was last year, but I think again, you're seeing that reflected in the overall outlook.
If you look at the sales, while most of our markets, especially our largest market down 5 to 10 on a retail basis, you're seeing our sales reflecting a more positive trend than that, and I think that's part of that story.
So probably not much more I can say on that, but hopefully gives you a little bit of additional color.
- Analyst
Am I able to sneak another half a question in?
- Director of IR
I think we're going to have to move on.
There's a large number of people still in queue.
Sorry, thank you.
Next caller?
Operator
The next question comes from Joe O'Dea from Vertical Research Partners LLC.
Your line is open.
- Analyst
Could you talk about the operating leases, and when you see higher volumes rolling off lease in the fourth quarter, just what the experience was with where that equipment went?
Whether the farmers who were leasing it were then buying it, the dealers were absorbing it, whether you took more of it than you normally do.
If we just think about that as a proxy for dealing with higher volumes coming off lease, moving forward.
- Director of IR
I think in the quarter we would have seen similar, maybe slightly higher return rates.
So it wasn't a major shift towards customers or dealers keeping that equipment.
So that continued.
But again, that's all factored in.
Any of those shifts would have been factored into the impairment and loss anticipation, or charges that we would have taken in the quarter, as we have through most of 2016.
We continue to look out over the next 12 months at our lease maturities, and based on more recent activity, both the return rate and loss rate would book what we think is an appropriate impairment on some of those future maturities.
So again, we would have -- I think the key there is we would have reflected that already, at least for the next 12 months in that outlook.
- Analyst
Great.
Thanks very much.
- Director of IR
Thank you.
Next caller?
Operator
Next question comes from Nicole DeBlase from Deutsche Bank Securities.
Your line is open.
- Analyst
Just a question around C&F.
Some of your peers have talked about channel inventories still being too high, and needing to work those down at the dealer level for the next several quarters.
I'm just curious how you view your current dealer inventory levels in the construction business?
- Director of IR
Appreciate that question.
We, as you saw really in our numbers for receivables and inventory last year, our dealers drew their inventory level down pretty dramatically in 2016.
As a result, while we're still on an inventory and receivable level bringing C&F down further, that's almost all inventory for C&F.
There's very little receivable reduction in that division.
And it's really just reflective, from a new equipment perspective, we think our dealers are in very good shape.
Now, the good news there is, if we ever do start seeing more positive trends in that market, for us, I think we'd be in a position where our dealer would likely need to add to their inventory from current levels.
So again, I think that's reflective of the good work the division and our dealers did in 2016, that we're able to put that type of forecast for sales in 2017.
- Analyst
And is there a similar dynamic on used inventory?
- Director of IR
No.
Used continues to be -- and that's one of the drags we continue to point to.
As I think Josh pointed out in the opening comments, used continues to be one of those weights, or headwinds, for that market.
Certainly our dealers aren't -- we would argue, probably in a little better shape than much of the competition but, again, that's a little harder to gauge, as well.
But certainly broadly for that market, would continue to be a headwind.
Thank you.
Next caller.
Operator
The next question comes from Stephen Volkmann from Jefferies LLC.
Your line is open.
- Analyst
So just a question about how to think about your forecasting ability.
Obviously a quarter ago, you gave us an idea of the full year.
We backed into the fourth quarter, which you then beat handily.
Normally I feel like you have good visibility a quarter out, and things don't change too markedly.
I'm just trying to figure out if that's changed or if you were maybe being conservative last quarter, or how I should think about your visibility relative to history.
- Director of IR
I'm assuming that question is mostly targeted towards ag, since that was the division that really had a pretty strong beat in the quarter.
I would tell you, from a sales perspective, clearly our sales were higher.
Pricing again was -- the incentive spend just wasn't as high in the quarter, so that was a big part of the -- most of the beat.
But as you think about even on a volume basis, we did see broadly some better sales levels, so it didn't come from all US and Canada.
It didn't come, even to the extent that there was increases in US and Canada, it was broadly across a number of products.
So it would be difficult for us to even call out, unless we put a very long list together where that sales increase came from.
And sometimes we'll have quarters where unfortunately everything moves against us, and we have a lot of little things that add up to a big negative.
This happens to be a quarter where we had a lot of little things that were positive, that all added up to a pretty nice advantage for us.
- CFO
Steve, to add to Tony's comments, the price and discounts we talked about was a beat, and then we also talked about higher volumes, and then higher volumes coming from regions four, three, and two, and region four, multiple units had a little bit higher volume.
And then better mix than we had anticipated, lower overhead spending, lower material cost, lower R&D, structural cost reductions beginning to pay off a little earlier.
So all of those things added to our beat in the Q4.
- Analyst
Great.
I appreciate that.
Thanks.
- Director of IR
Thank you.
Next caller?
Operator
Next question comes from Seth Weber from RBC Capital Markets.
Your line is open.
- Analyst
Happy Thanksgiving.
Most of the questions have been asked.
Just a real housekeeping.
Is there any color on the impairment charge that you took in the quarter, the $25 million, is there any more details you can give us on that?
- Director of IR
The only other thing, and you'll see it certainly in the -- when we release the K, but it is almost -- we talk about it being international.
It really relates to both our Chinese operations, as well as the joint venture in Brazil.
It's roughly half and half for C&F.
So it's about $13 million related to C&F, China, operations in China, and then about $12 million related to the joint venture in Brazil.
- Analyst
That's all I had.
Thank you.
- Director of IR
We have time for -- we'll squeeze one more call in.
Operator
Thank you.
The next question comes from Adam Uhlman from Cleveland Research.
Your line is open.
- Analyst
Happy early Thanksgiving again.
I'm wondering, Raj, you mentioned in your remarks that you -- that there had been some changes to the compensation plans, I believe.
I didn't really hear that out.
I was wondering if you could expand on how you're changing the incentives at the Company, and what that means for 2017 as well?
- CFO
This is for the short-term incentive.
At trough, we had maximum payout at 13% operating return, operating assets.
That went up to 16% now.
So that's specifically what I was referring to.
- Director of IR
And keep in mind, we did increase -- historically that would have been 12%.
Last year for 2016, it went to 13%, and for 2017, we're bumping that up yet again to 16%.
I'll point out a slight increase at mid cycle as well.
Last year we bumped it to 24%.
That moves to 26%.
- Analyst
Thank you.
- Director of IR
All right.
Thank you.
Again, we appreciate your participation on the call.
As always, we'll be available throughout the day to take any follow-up questions.
Thank you.
Operator
Thank you.
That concludes today's conference.
Thank you all for your participation.
All participants may disconnect at this time.